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FINANCIAL MERCHANDISE MANAGEMENTPRESENTED BY:JAI BAKLIYAPALAK DHAMECHAPOOJA AJMERASALONI SHAHChapter ObjectivesTo describe the major aspects of financial merchandise planning and managementTo explain the cost and retail methods of accountingTo study the merchandise forecasting and budgeting processTo examine alternative methods of inventory unit controlTo integrate dollar and unit merchandising control concepts2Financial Merchandise ManagementThrough FMM a retailer specifies which products purchased, when products are purchased, and how many products are purchased.Dollar control involves planning and monitoring a retailers investment in merchandise over a stated period.Unit control relates to the quantities of goods a retailer handles during a stated period.3Benefits of Financial Merchandise PlansThe value and amount of inventory in each department and/or store unit during a given period are delineated.The amount of merchandise a buyer can purchase during a given period is stipulated.The inventory investment in relation to planned and actual revenues is studied.The retailers space requirements are partly determined by estimating beginning-of-month and end-of-month inventory levels.4Benefits of Financial Merchandise Plans (cont.)A buyers performance is rated. Measures may be used to set standards.Stock shortages are determined and bookkeeping errors and pilferage are uncovered.Slow-moving items are classified, leading to increased sales efforts or markdowns.A proper balance between inventory and out-of-stock conditions is maintained.5Inventory Accounting SystemsThe cost accounting system values merchandise at cost plus inbound transportation charges.The retail accounting system values merchandise at current retail prices.6Cost Method of AccountingThe cost to the retailer of each item is recorded on an accounting sheet and/or is coded on a price tag or merchandise container.Can be used with physical or book inventories:Physical inventory actual merchandise countBook inventory recordkeeping 7Physical Inventory SystemEnding inventory recorded at cost is measured by counting the merchandise in stock at the close of a selling period.Gross profit is not computed until ending inventory is valued.Gross profit is derived during full merchandise count.8Book Inventory SystemThis system avoids the problem if infrequent financial analysis by keeping a running total of the value of all inventory on hand at cost at a given time.A book inventory lets a retailer uncover stock shortages by comparing projected inventory values with actual inventory values through physical inventory.LIFO and FIFO are two methods to value inventoryDisadvantages of Cost-Based Inventory SystemsThey require that a cost be assigned to each item in stockDo not adjust inventory values to reflect style changes, end-of-season markdowns, or sudden surges of demand10The Retail MethodWith this method Closing inventory is determined by calculating the average relationship between the cost and retail values of merchandise available for sale during a period.11Determining Ending Inventory ValueCalculating the cost complementCalculating deductions from retail valueConverting retail inventory value to cost12Advantages of the Retail MethodValuation errors are reduced when conducting a physical inventory since merchandise value is recorded at retail and costs do not have to be decoded.Because the process is simpler, a physical inventory can be completed more often.Profit-and-loss statement can be based on book inventory.Method gives an estimate of inventory throughout the year and is accepted in insurance claims.13Limitations of the Retail MethodBookkeeping burdenEnding book inventory is correctly computed only if the following are accurate:Value of beginning inventoryPurchasesShipping chargesMarkupsMarkdownsEmployee discountsTransfersReturnsSales Cost complement is an average based on the total cost of merchandise available for sale and total retail value.14Merchandise Forecasting and Budgeting: Dollar Control

Designating control unitsSelection of control unitsSuch classifications must be narrow enough t isolate oppurtunities and problems with specific merchandise lines.Consistent control units with other companiesInternal comparisons are meaningful only when categories are stable.External comparisons are not meaningful.Classification merchandisingSales ForecastingA retailer estimates its expected future revenues for a given period by sales forecasting.Most important step is accurate sales forecasting.Larger retailers often forecast total and department sales.Small retailers rely more on guesstimatesHandy Hardware Store Sales Forecast Using Product Control Units

Inventory Level PlanningInventory level must be sufficient to meet sales expectations.Techniques to plan inventory levels are the basic stock percentage variation, weeks supply and stock-to-sales methods.Basic stock method:

Basic stock (at retail)= Average monthly stock at retail- Average monthly sales

Beginning of the month planned inventory level (at retail)= Planned monthly sales+ Basic stock

Percentage variation method:

Beginning of the month planned inventory level (at retail) = Planned average monthly stock at retail * [1+ (Estimated monthly sales/Estimated average monthly sales)]

Weeks supply method:

Beginning of the month planned inventory level (at Retail) = Average estimated weekly sales * Number of weeks to be stockedReduction PlanningRetail Reductions : - the difference between beginning inventory plus purchases during period and sales plus ending inventoryPlanned ReductionsMarkdownsEmployee and other discountsAnd stock shortagesPlanned reductions = (Beginning inventory + planned purchases) (Planned sales + ending inventory)Two key factors: Estimating expected total reductions by budget period & assigning the estimates monthly.Planning Reductions Consideration: -Past experienceMarkdown dataChanges in company policyMerchandise carry overPrice tendsStock shortage trendsPlanning PurchasesFormula: -Planned sales for the month + Planned reductions for the month + Planned end-of-month stock Beginning of month stockOpen to buy: -Difference between planned purchases and the purchase commitments already made by buyer for the given period, often one month.

Planning Profit MarginsRequired initial markup percentage = Planned retail expenses + planned profit + planed reductions / Planned net sales + planned reductionsUnit Control SystemsQuantities of merchandise in units not in dollars.Physical Inventory systemsPerpetual Inventory Systems

Stock TurnoverNumber of times the average inventory on hand is sold.High rate-Eating places, gasoline service stations and grocery stores. They rely on sales volume.Low rate- Department stores, Jewelry stores, Clothing stores. They require larger profit margins on each item.Annual rate of stock turnover-

Number of units sold during year/Average inventory on handNet yearly sales/ Average inventory on handCost of goods sold during the year/Average inventory on handProblems in RetailProfits are lower as prices are reduced in order to move the high inventory.Therefore it affects the return on investment as Turnover as well as profit per unit both are important.True Average is not taken.Gross Margin Return on InvestmentRelationship between Gross margin in dollars (operating profits) and average inventory investment by combining profitability and sales to stock measures.Helps the management, see the average amount that the inventory returns above its cost. A ratio higher than 1 means the firm is selling the merchandise for more than what it costs the firm to acquire it.

GMROI= Gross margin in dollars/ Average inventory at cost.It shows how diverse retailers can prosper.Supermarket- Gross margin of 20% and Sales-to-stock ratio 25%. Therefore 500% of GMROI.Clothing store- Gross margin of 50% and Sales-to-stock ratio 10%. Therefore 500% of GMROI.

ReorderingWhen stock on hand reaches the reordering point.EOQ- Quantity per order that minimizes total costs of processing orders and holding inventory.EOQ formula must be modified according to the Quantity discounts, demand changes and Variable holding and ordering costs.THANK YOU